Commodity Prices and Monetary Policy Create Three Tier Global Growth

On the back of a continuing fall in commodity prices, the macro outlook continues to split into three camps. In order of promising outlook these are, first the US, second the consuming / creditor nations such as the northern half of the EU; and thirdly the producer / debtor nations including most emerging markets.

The US is one of the largest producers of oil, coal, steel and gas but also one of the largest consumers of commodities. Its continuing ability to trade with itself has increased employment further, with Friday’s jobs report of 215,000 jobs added complemented by an increase in worker hours from 34.5 to 34.6 per week, with the extra six minutes per worker equal to another 300,000 jobs but also an indicator of improving productivity. Improving economic conditions have increased the probability of a Fed Funds rate rise perhaps as early as next month. These two conditions have led to a huge influx of investor money into the US, as the continuing bull market in equities testifies. The strengthening dollar is improving profits for US exporters, increasing funds available for investment or for distribution to shareholders.

For consuming / creditor nations, economic conditions are relatively benign. Lower commodity prices help, despite the strengthening dollar, while currency variations (sterling relatively strong, the Euro and Yen relatively weak) seem to be balancing out the benefits and costs respectively to exporters and importers. For these nations, the arbitrage between sources of supply, whether geographical or by type, are driving decisions on trade. For instance, cheap natural gas is driving down demand for coal for electricity generation, with environmental benefits. This middle band of countries has some time in hand to adjust loose monetary policy while dealing with national deficits. Governments will be able to take advantage of macro conditions to be more lenient on fiscal policy, loosening the reins of austerity and presumably harvesting votes in the process.

The producer / debtor nations on the other hand are suffering from low prices, which are pegging back social, welfare and infrastructure spending and increasing government and State Owned Enterprise indebtedness. Attempts to devalue currencies to support exporters only increase the cost of borrowing in dollars on the international money markets. After years of encouragement from the likes of the IMF to borrow money and build infrastructure and productive capacity, these countries are now left with unprofitable industries unable to service dollar-denominated debt. The worst case is perhaps Venezuela, which relies on oil exports for 96% of government revenues. But the Middle East, Russia, Brazil, and a number of the Asian tiger economies are struggling as a consequence of lower commodity prices and weakening currencies.

The raft of economic data coming out of China this week may only emphasise producer /debtor nations’ dependence on China as a key customer and could increase concern regarding their ability to service debt. It seems like the pendulum of economic growth has swung away from the emerging markets and back to the OECD. The implications for shipping demand are unclear, but previous experience tells us that weak Asian economies and weak emerging markets are bad for trade growth. Fingers crossed that the commodity price cycle is near to bottoming out.

Axis of Leverage: A new structure of finance and credit reporting emerges from the East

Chinese news agency Xinhua has established the China Economic Information Service to provide credit information on countries, businesses and projects involved in the “Belt and Road” initiative. The CEIS will provide credit reports, credit ratings and provide consultancy to international investors, creditors and traders involved in China’s plan to open up new trade routes and trading partners in Central Asia, Russia, Europe, Africa and Latin America. Xinhua reminds us that “The Belt and Road Initiative is a trade and infrastructure network including the Silk Road Economic Belt and the 21st Century Maritime Silk Road proposed by China in 2013. The network connects Asia, Europe and Africa and passes through more than 60 countries and regions with a population of 4.4 billion.” Assuming that the companies CEIS reports on are going to be in large part Chinese controlled, readers may have their own opinion about the independence of CEIS’s ratings.

The Belt and Road plan advanced further this week with the launch of the BRICS New Development Bank in Shanghai on Tuesday. The NDB will be headed by KV Kamath, formerly the head of ICICI from India. According to China’s finance minister Mr Lou Jiwei, the NDB will “supplement the existing financial system in a healthy way and explore innovations in governance models.” The latter part of that announcement is perhaps the more interesting, hinting at a separation from prevailing (i.e. western) governance models and possibly even accounting standards. Mr Lou went on to say that the NDB will have greater respect for “developing countries’ national situation, and more fully embody the values of developing countries…Development is a dynamic process. There’s really no such thing as so-called ‘best practices’.” The comparison is made without reference to any other body or organisation but, as the motto goes, fidem vita fateri: the deeds will reveal the intentions.

For now, the NDB is established with capital of USD 100 Bn, the same as the recently-launched Asia Infrastructure Investment Bank, with the intention to double NDB capital to USD 200 Bn in the coming years. Brazil, Russia, India, China and South Africa will all have equal voting rights, whereas developing nations have limited voice in the IMF and World Bank. As we reported a few weeks ago, China has pledged around USD 300 Bn in overseas infrastructure spending in the year to date. The AIIB, the NDB and the CEIS are part of a growing, alternative structure to the IMF, World Bank and western credit agencies, thus avoiding the bothersome OECD insistence in tying together economic assistance with political reform. Any senior executive or politician in emerging markets will have seen the way the EU dealt with Greece and may have concluded that alternative structures may offer a refreshing alternative to browbeating and demagoguery.


Grexits, Brexits, Coke Withdrawal Symptoms

Grexit fatigue appears to have overcome investors in the last week. The final dénouement of Syriza’s self-imposed tragedy will happen this week after the Eurogroup responded like a parent shocked at their child’s cheeky remarks, and send Tsipras back to his room to consider the consequences of his truculence. The referendum next weekend is an irrelevance, as the bailout will no longer be available even if the Greeks vote for it.

Capital flight, a run on the banks, migration and social disorder may all follow. But investors, long used to Hellenic brinkmanship, appear sanguine about all of this. The Euro has lost half a cent against the dollar this morning. Borrowing costs in countries that looked in trouble in 2012 have not rocketed, though they are up on average by 45 bps at the time of writing. European stock markets have trembled but not collapsed. The external costs of Grexit appear to have been priced in for some time.

What happens in Greece might provide food for though for a UK Conservative government now openly split about whether the UK should stay in or leave the EU. A Brexit would lead to the breakup of the union with Scotland, which would surely vote to stay in the EU. The political cost to the Westminster government would be incalculable. A bevy of bankers has visited the Treasury to signal their readiness to leave London should a Brexit occur, or possibly even if the Chancellor presses ahead with a bank levy policy yet to be implemented. He may yet call their bluff, but his Eurosceptic MP colleagues may be harder to whip into line.

Such local concerns have passed by the Chinese government which, pressed in one direction by a manufacturing slowdown and in another by a stock market bubble, reduced borrowing costs by 25 bps over the weekend in a long-flagged move. This won’t be enough to drive domestic spending to a level to replace lost export demand, as the bellwether steel industry shows. Import data show that coking coal imports to China fell 68 per cent year on year and 50 per cent month on month in May to 1.88 Mn T, the lowest level since March 2009. Imports from Australia fell 36 per cent year on year and 43 per cent month on month. For Jan-May 2015, coking coal imports were down 35 per cent year on year to 16.56 Mn T.

Iron ore, coal and oil prices have all roughly halved in the last year. The divergent freight markets for dry and wet commodities reflect variance in demand for end products especially in emerging markets. The dry cargo shipping industry must adjust supply accordingly. 26 Mn Dwt of demolitions year to date suggest that fleet growth in bulk carriers will be almost zero net of an annualized 52 Mn Dwt of removals this year. But don’t expect an immediate rebound in freight markets in January 2016: oversupply will continue to haunt dry cargo shipping markets. At least they won’t be further hamstrung by Grexits, Brexits or Jocksits.

New Year, new ventures

Happy New Year everyone!!

I am delighted to announce the start up of my new company, Democrata Maritime Limited.

Based at Harwell Science Park in Oxfordshire, Democrata Maritime applies Big Data analytical techniques to maritime operations management, risk management and investing.

Democrata Maritime provides better insights faster and more frequently than traditional business models can.

You can contact me by email for more details on






Autumn Tour 2014

Here is a list of the conferences I am booked to speak at during 2H 2014


Monday 22 September – Alternative Ship Finance Seminar, London

Weds 1 October – International Iron Ore Conference, Prague

Weds 15 October – Indian Shipping Summit, Mumbai

Monday 1st November – Ship Finance Academy, London

Tuesday 4 November – International Bunker Industry Association Convention, Hamburg

Tuesday 18 November – Asian Logistics and Maritime Conference, Hong Kong



Let me know if you are going to any of these!

International Festival for Business

I visited Liverpool on 16 and 17 June to attend and speak at the International Festival for Business.

Amazing to see how much the city has developed over the last few years, and to feel a renewed optimism among the maritime community there.

Liverpool’s success in the past was due to its geography; it faced the New World and benefited accordingly.

The new containership port offers the opportunity to link Liverpool directly to the Emerging Markets and Middle Income economies of Asia, via the expanded Panama Canal.

The rise of the US as the oil refining and exporting hub for the Atlantic surely offers Liverpool opportunities as well.

I returned home from that visit as buoyant as when I visit Shanghai or Mumbai.  Great to see a mature maritime hub reinventing itself.


On BBC Radio

As the Maersk McKinney Moller, the latest in the Triple E class of container ships, approached Europe for the first time, national media was provoked to peer into the world of container shipping.  I was asked to comment on the container shipping markets in an interview on BBC Radio 4’s morning radio news show.  You can listen to it here:

MW on R4 20130816.

It’s just a pity that Dominic mispronounced the company name!





Where are we and where are we going?

I was asked by a client to write a brief statement on where the industry is and where it is going. This is what I wrote back:


Shipping, uniquely exposed as an industry to almost every other sector of the global economy, enjoyed a super boom during the years of rapid globalization following China’s entry to the WTO on 31 December 2001.  Equally, the shipping industry has suffered from the slump in demand and trade that followed the credit crunch beginning in 3Q 2008.  Oversupply is dampening earnings in the dry cargo, oil tanker, container shipping and passenger/cargo sectors in all geographies.  An excess of tonnage combined with limited bank finance has depressed second hand values by as much as 70 per cent from their mid-2008 peaks, while many ship owning companies are in negative equity, having ordered newbuildings at the top of the cycle with up to 80 per cent finance, only to find the loans are now worth considerably more than the assets. One consequence of this slump in values is that many banks now consider the economic life of a ship to be only 15 to 20 years rather than 20 to 25 years, further restricting credit availability for ship owners.

As earnings have slumped to operating cost levels and below (notably in the VLCC sector), shipyards have promoted new ‘eco design’ ships with lower fuel consumption, emissions scrubbers, dynamic hull forms, advanced propellers, and in some cases dual fuel capability.  While these new ships are contributing to oversupply in the short term, they will also render older tonnage obsolete and uncompetitive faster than was envisaged. It is expected that recent high levels of demolition and fleet renewal will continue in the medium term (1-5 years).  A subsequent moderation in fleet growth will coincide with economic recovery and trade growth to bring the freight and asset markets back to ‘normality’ perhaps as early as 2014 but probably not until 2015 or even 2016 depending on the influence of external risks to economic growth. 

There are notable exceptions to the current gloomy outlook.  High oil prices have encouraged offshore oil and gas exploration, leading to a boom in offshore shipping activity and earnings.  The rise of shale gas has led to massive investments globally in unconventional gas production with a concomitant boom in LNG ship orders and earnings. Chemical by-products of the oil and gas industries (feedstocks) are growing in volumes so there is a more positive outlook for chemical shipping, including LPG and ‘easy chemicals’.

As ever, the fortunes and strategies of the shipping industry are subject to uncontrollable macro-economic and geopolitical risks.  A ‘back to basics’ approach combining rigorous cost management, prudent investments across the asset cycle and recognition of the supremacy of cargo is providing some ship owners and operators with a positive return. Nonetheless, few observers or participants in the industry expect a return to the boom years of the last decade.


Can Oil Prices Indicate Tanker Market Direction?


This week the OPEC basket price is down to US$ 98.78, the third weekly price point below US$ 100 this year, following a dip to a low of US$ 97.23 on 19 April 2013.  The OPEC basket price started the year at an average of US$ 109.28 for January and, after a peak in February to an average of US$ 112.75, it has trended downwards since.  The price has still averaged over US$ 100  in 2011, 2012 and 2013 to date but is it displaying weakness or stability now? 

By comparison, the WTI price has settled in a range of US$ 90 to US$ 100 since May 2012 whereas in the year before it varied between a high  of US$ 113 in April 2011 and a low of US$ 78  in August 2011.  Brent Crude Oil meanwhile has traded from a high of over US$ 126 in April 2011 to a low of US$ 97.57 in April 2012.  From a year-to-date peak of US$ 118.89 on 8 February, Brent trended solidly downwards to mid-April before becoming range-bound between US$ 100 and US$ 110 per barrel. Do these flat-lining prices indicate that the inflationary cycle in oil prices has been broken?  Or are the oil markets awaiting a clear steer from governments in the US, Europe, Japan, India and China about economic and financial policy? 

Production targets appear to remain in place for OPEC and non-OPEC producers. On 31 May, OPEC reported it would keep its production target unchanged at 30 million bpd of crude oil, although at its meeting in Vienna the producers’ cartel acknowledged the threat from growing US oil production. Uncle Sam’s oil wells are likely to produce more oil than is imported, on a million bpd basis, at some point in 2013, reversing the prevailing situation since 1993 when average imports were 6.78 million bpd and average production was 6.85 mbpd.

Perhaps the slowing variability in oil prices reflects a more fully-supplied global oil market and a slow down in the rate of growth in oil demand, which is negative in the mature OECD nations and reliant on fast growth in the BRICS and related economies. The IEA has recently forecast that Chinese oil demand will grow at 390,000 bpd in the coming five years compared to 450,000 bpd for the last decade. Against this backdrop of weak demand growth, oil prices are likely to be a product of supply management, which may not augur a rapid return to strong profits for the crude oil tanker markets.